Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,550,000 in annual sales, with costs of $808,000. If the tax rate is 35%, what is the OCF for each year of this project? (Enter the answers in dollars. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.)

OCF1 [ ]$
OCF2 [ . ]$
OCF3 [. ] $  

Answer 1

Answer :

First, Calculate the depreciation for three years as follows :

Year 1 = ( 2,900,000 * 30% ) * 50% = 435,000

Year 2 = ( 2,900,000 - 435,000 ) * 30% = 739,500

Year 3 = ( 2,465,000 - 739,500 ) * 30% = 517,650

Now,

Calculation of Operating cash flow for each year as follows :

Particulars	Year 1	Year 2	Year 3
Sales	2,550,000	2,550,000	2,550,000
Less : Costs	808,000	808,000	808,000
Less : Depreciation	435,000	739,500	517,650
Profit before tax	1,307,000	1,002,500	1,224,350
Less : Tax @ 35%	457,450	350,875	428,522.50
Profit after tax	849,550	651,625	795,827.50
Add : Depreciation	435,000	739,500	517,650
Operating cash flows	1,284,550	1,391,125	1,313,477.50